Beats | July 27, 2020

MIT Solve rallies to provide bridge loans and revenue-based financing

Casey van der Stricht
Guest Author

Casey van der Stricht

ImpactAlpha, July 27 – Melissa Menke had to re-write the entire operational playbook of Access Afya in response to COVID-19. Menke founded Nairobi-based Access Afya in 2012 to provide affordable, quality health care for emerging markets’ urban poor. The for-profit social enterprise operated clinics in Kenya’s city slums, as well as a custom digital health platform that stores and synchs patient information, supports and upskills clinicians to address physician shortages, and automates SMS follow-ups to ensure that all patients are cared for, even after they leave the clinic. Menke calls the platform “Clinic 2.0.”

But when the pandemic started, patients were afraid to go to clinics. Also, Nairobi, like many other cities, instituted a dawn-to-dusk curfew, making health services harder to access. The pandemic not only threatened individual health, but also the very infrastructure that enables healthcare for the most vulnerable.

To navigate these new challenges, Menke and her team had to get creative, quickly. Although Access Afya had more than 10 months of financial runway before COVID, the accelerated pivot to a telehealth platform required new sources of flexible contingency funds.

The challenge for enterprises like Access Afya is that traditional funding options have cooled during the pandemic. Many venture funds are adopting a wait and see approach, and some investors are pulling back. Estimates indicate that valuations are contracting as much as 20-30% from year-end 2019 levels, and social entrepreneurs are no exception.

This is a mistake. Many impact-focused entrepreneurs are poised to grow, as the need to focus on essential services to the most vulnerable increases, especially during COVID-19. Indeed, businesses that provide vital services to vulnerable populations must be able to accelerate existing plans and re-deploy their systems to address the new challenges presented by the pandemic.

Furthermore, impact investing structures can provide uncorrelated diversification opportunities, as patient and risk-tolerant capital could out-perform volatile traditional markets in the current context.

Solve Innovation Future and its partners are not only working to deploy capital to social entrepreneurs at a time of urgent need, but we are doing it through innovative and flexible capital structures that can actually help social entrepreneurs and impact investors alike capture opportunity during these uncertain times.

Bridge capital to bridge health services

To support Access Afya’s urgent pivot, Menke got in touch with Open Road Alliance, a private philanthropic initiative that provides loans and grants to help entities overcome discrete unforeseen roadblocks, and was able to secure a grant to hire a developer to update the enterprise’s digital health platform. She also secured additional investment funding through a bridge round of nearly $1 million, including one of the first investments from Solve Innovation Future, MIT Solve’s philanthropic investment vehicle.

With this funding, Access Afya was able to provide its health teams with protective equipment, bring elderly patients to the clinic early, and work to dispel myths about COVID-19 publicly. The team also began remapping care pathways and pushing outreach into virtual care plans, which have now become essential to providing quality healthcare and offer an opportunity for Access Afya’s future expansion.

Bridge loans and grants can quickly position a startup to pivot or deal with unforeseen circumstances: delays in funding, taking advantage of a new opportunity, and the current COVID-19 crisis. They are deployed in-between formal funding rounds, and also help protect current and future investors.

Open Road Alliance excels as a specialist provider of bridge capital, but more impact investors could take advantage of this opportunity and provide critical funding in these uncertain times.

“Though the current demand for ‘emergency funding’ has reached historical proportions, the need has always been there,” says Open Road Alliance’s Maya Winkelstein. “We’ve spent eight years building a model to ensure that the social sector has access to the fast and flexible funding they need in moments of crisis. It’s not just about overcoming an obstacle, it’s about maintaining the impact that we have collectively worked so hard to build.”

“In the post-COVID-19 era, our society will depend on the outcomes of the social sector, more than ever,” she adds. “Emergency funding done right is about keeping impact on track at the organization and systemic level. The world is inherently unpredictable and our funding models have to adapt to this permanent reality.”

Revenue-sharing to accelerate online education

When Kinedu, an app-based early childhood education startup that supports parents and caregivers, needed fresh capital for growth, Solve stepped in with a revenue-sharing agreement alongside the most recent portion of its Series A round. With parents working from home and daycares closed because of COVID, founder Luis Garza was able to provide the premium application for free during March and April, growing Kinedu’s user base to over one million across Mexico, Brazil, and the U.S.

“Solve and I agreed that flexible terms made the most sense in this uncertain time,” said Garza. “With this extra cash as operating capital, Kinedu can continue offering free and promotional rates for parents to use the app while at home, and accelerate the launch of additional products that will help support caregivers and independent daycare centers.”

Revenue share agreements are still used sparingly in the impact investing space, but they are a great tool for organizations with a healthy monthly recurring revenue. They give the entrepreneur the growth capital they need, while keeping equity and maintaining company control—all without the pressure to drive for an exit. At the same time, investors can earn attractive, market-rate returns, making them appealing to both entrepreneurs and investors.

Furthermore, revenue sharing agreements allow social entrepreneurs to access bridge capital before raising a new round, which could be postponed due to economic circumstance.

“Revenue-based financing agreements are powerfully simple. They’re easy to understand, structure, and implement,” says Sorenson Impact Center’s Geoff Davis, a member of Solve Innovation Future’s investment committee. “This flexibility and alignment is especially helpful in times of uncertainty like we’re in right now.”

Investing philanthropic capital in a time of crisis

With investor reticence to deploy traditional capital to early-stage social entrepreneurs at this time, an alternative option is to make equity or debt investments with philanthropic capital from a donor-advised fund, known as a DAF.

DAF capital stood at $37 billion funded in 2018 and continued to grow in 2019, according to estimates from The Chronicle of Philanthropy. This capital typically sits in non-impact aligned investments before being granted out. Moving it to impact-aligned investments could help fill a critical funding need at this time.

Solve’s own investment fund, Solve Innovation Future, which was launched in 2019, is backed by DAFs. The fund makes direct investments in “Solver” teams found through Solve’s open-innovation network. The DAF structure gives the fund flexibility to make traditional and alternative investments in early-stage funding rounds, while also enabling the fund to recycle capital: proceeds from investments are re-invested into future Solver teams—demonstrating a disruptive form of philanthropy.

Thirty-two teams join MIT Solve’s latest “open innovation” cohort

Solve Innovation Future is managed by ImpactAssets, which specializes in using DAFs for impact investments. With $1 billon now under its control, the nonprofit is helping pave the way for innovative disbursement of these funds.

“We’re seeing our donor community leaning in to shore up their portfolio companies and support marginalized communities that might not be reached by the U.S. Small Business Administration programs,” said ImpactAssets’ Margret Trilli. “Everything is up—the volumes in grant-making and impact investments measured both in terms of number and volume—at levels we have never seen before, even in a crisis.

In the first quarter of 2020, ImpactAssets saw 3.5x the normal volume in grants and 2x in impact investments, while in the second quarter, impact investment commitments far exceeded investments made at the same time last year, Trilli explained.

Catalyzing capital with guarantees

Another approach to spurring impact investing through creative philanthropic commitments is through guarantees. Guarantees leverage philanthropic capital as a safety net for return-seeking investors. As for-profit lenders and investors shy away from taking big bets, guarantees can de-risk investments and crowd-in more capital in times of uncertainty.

Guarantees are a familiar and effective tool to other nonprofit and philanthropic venture funds, like MCE Capital. The guarantees MCE deploys across its portfolio have allowed them to return 100% of both principal and interest to investors since its founding in 2006.

The advantages of guarantees is that they are straightforward to structure, and because the capital may never be called, they can be re-deployed in the future. In the case of a default, the guarantee is pooled across guarantors and can be written off a charitable tax deduction.

Now is not the time to pull back from supporting impact entrepreneurs who are already providing essential services to vulnerable populations – on the contrary, we need to invest more in them with the right flexible, innovative, and risk-tolerant capital.

Casey van der Stricht is Principal of Solve Innovation Future: the philanthropic venture vehicle for MIT Solve. Launched in 2019, Solve Innovation Future uses debt, equity, and alternative structures to invest in Solver teams—entrepreneurs driving social and environmental impact, selected annually through Solve’s open innovation Global Challenges. To learn more: contact Casey at [email protected]